Impact Of GST On Various Sectors In India

Now that the Rajya Sabha has passed the Goods and Services Tax (GST) Constitutional Amendment Bill, which the Lok Sabha had already approved last year, all attention will shift to the impact of GST on India and how the GST rate would be applied at the central and state levels with regard to the prices of various goods and services.

According to tax experts, under the GST regime (expected from April 1, 2017), consumers goods, small and mini cars, bikes, residential apartments, cinema tickets, cable and DTH bills among others may become cheaper. But more on it in a bit. Here is what happened on August 3 with the much-debated GST Bill.

Technically, the GST Bill is called The Constitution (One Hundred and Twenty-second Amendment) Bill, 2014. It was listed for discussion and passing in the Rajya Sabha on August 3rd. In a house of 243 members, the Bill got 203 votes in favour and none against. The Bill was debated for over 7 hours with the debate beginning at 2 pm on August 3.

On August 4, Thursday, the government is expected to reveal the road map for implementation of GST, said Revenue Secretary Hasmukh Adhia after it was passed in the Rajya Sabha.

"The GST bill will empower the states, will increase revenue of states as well as Centre. It'll ensure that there is 'no tax on tax' "finance minister Arun Jaitley said on Wednesday in the Lok Sabha.

WHAT IS GST?

The main objective of the GST is to unify the taxes levied by the center and the states into one uniform rate. GST is a uniform indirect tax levied on goods and services across a country. Many developed nations tax the manufacture, sale and consumption of goods using a single, comprehensive tax.

India Inc. responded positively on the news of GST passing in Rajya Sabha stating it will add to the efforts of ease of doing business in India in coming years.

IMPACT OF GST ON VARIOUS SECTORS

Cars under the GST regime will become cheaper. "Under GST, importer-distributors as well as domestic resellers should be able to claim credit of GST paid on all business procurements of goods and services, as opposed to the current scenario, where they cannot claim a credit for the duties/ taxes paid on capital assets and input services availed," said Sarika Goel, Tax Partner, EY India.

With no embedded tax costs on inter-state movement of goods (CST or non-creditable entry taxes), automakers would have greater flexibility to re-design their supply chains and thus, optimize logistics costs. Automobile exports should also benefit with the elimination/ reduction in embedded tax costs.

However, the main issue facing the auto sector is the ambiguity regarding rate of GST - whether there would be a differential rate for mid-segment/ luxury-segment cars, as recommended by the CEA's report on GST rates? If yes, how would the segments be defined and what would be the delta in the rates vis-à-vis small cars or the RNR, is the big question on industry's mind.

"Another key issue where the industry would like clarity at the earliest is the fate of incentives that have been promised to various automakers while setting up of their manufacturing plants by respective State Governments in the form of VAT/ CST linked subsidies and/ or deferment of taxes," said Goel. Any change in the agreed terms for disbursal of such incentives would have an impact on the ROI from manufacturing operations; consequently also impacting decision-making by the Auto sector on infusion of additional capital investments in India, Goel said.

Experts said the Model GST Law is silent on the treatment of used-car sales. This is another important area where clarity is required, said a senior auto analyst. "A major part of the pre-owned vehicle sales presently take place in the unregulated market space and the GST rules regarding the same would be a determinative factor for inclusion of this segment within the GST net," said Goel.

IMPACT OF GST ON REAL ESTATE & INFRASTRUCTURE

For the real estate sector that is already subject to multiple taxation, the implementation of GST is theoretically expected to help the consumers and builders. However, there are some concerns too? Says Abhishek Jain, Tax Partner, EY India: "Eligibility of credits and concessions still remain a cause of worry for the real estate sector. The Model GST Law restricts credit on goods and services acquired for construction of immoveable property (other than plant and machinery). This clause is interpretative which may lead to litigation and result in denial of credits in certain situations."

With the uniform tax, developers will have free input credits on GST paid for services and goods purchased by them which will reduce cost and can be passed as reduction to buyers, said Brotin Banerjee, MD & CEO, Tata Housing.

"It will benefit real estate sector by ensuring a uniform tax structure and improve tax compliance by developers. It looks at bringing in greater transparency for the sector and may minimize unscrupulous transactions. GST will have a cascading effect for the home buyers, as developers with more margins in their hands will be able to restructure the cost of the products in favour of consumers," he said.

But the infrastructure sector would welcome the introduction of GST as it would give an impetus to the overall economy and in turn the infrastructure sector. However, at the same time, this sector would be keeping its fingers crossed as there is no clarity on the fate of the current indirect tax exemptions/concessions for this sector continuing in the GST regime, said Jain.

IMPACT OF GST ON OIL & GAS

According to Abhishek Jain, Tax Partner, EY India - "The Oil & Gas Industry would largely be negatively impacted by the introduction of GST; the reason being that 5 petroleum products (ie crude, natural gas, ATF, diesel and petrol) are excluded from the coverage of GST for the initial years while the remaining petroleum products (for eg kerosene, naphtha, LPG, etc) are covered within the coverage of GST. "Because of this peculiarity, this industry would be pained to comply with both the current tax regime as well as the GST regime," he said. Also it would result in non-creditable tax costs for eg a refinery producing diesel & petrol will pay GST on the procurement of plant, machinery and services; which GST would not be creditable against the out excise duty & VAT which would be levied on petrol & diesel. The said tax costs would have an inflationary impact on the overall economy," he said.

IMPACT OF GST ON MEDIA & ENTERTAINMENT

Since the levy of entertainment tax will remain the right of local bodies, chances are that under the GST regime, cinema tickets prices may come down though experts remain skeptic on the overall impact.

Uday Pimprikar, Tax Partner, EY said: "The entertainment taxes imposed by local bodies may be considered negative if the same are imposed at punitive levels and are not recoverable from the general public."

DTH and cable television services are expected to become cost effective under the GST regime. But the quantum of DTH and cable bill will depend on the levy of entertainment tax. "While service tax and state level entertainment tax shall be subsumed in the GST, the effective entertainment tax incidence is expected to reduce. However, the overall impact on the tax and revenue side will depend on the quantum of entertainment tax imposed by local bodies," said Pimprikar. "Under the GST regime, the tax cost on procurements for DTH and cable service providers should reduce on account of larger availability of credits," he said.

IMPACT OF GST ON RETAIL/CONSUMER PRODUCTS 

Consumer goods are expected to become cheaper under the GST regime as the current rates of taxation are in the range of 23-25 per cent while the GST rate is expected to be much lower. According to Suresh Nair, Tax Partner, EY GST will also address the challenge of tax leakages in supply chain when procured products through contract manufacturing. GST should effectively be beneficial for the consumer goods and FMCG companies," said Nair.

IMPACT OF GST ON E-COMMERCE

GST regime should bring relief to the e-commerce players as the E-commerce business model has evolved from the traditional 'inventory led model' to 'pure or curated market place' and / or services model which has to deal with complex tax framework involving CST, VAT, excise, and service taxes making it difficult for e-commerce companies to operate within.

The GST law will address the issues related to inter-state movement of goods by e-commerce players thereby helping the e-commerce players who are today subjected to entry taxes by destination states along with the requirement of statutory forms, way-bills, road-permits, local registration and other such requirements says Manish Saigal, Managing Director with Alvarez & Marsal.

However, there are some negatives that are of concern to the industry, Saigal adds. "The mandate of tax collection by states from e-commerce companies could result in significant compliance burden on e-commerce companies and credit build-up along with cash flow issues for the vendors listed on the marketplaces. Also, the supplies reported by the e-commerce firm will be matched with the details given by the supplier in the return for outward supplies and in case of a mismatch; the output liability of the vendor will be re-determined. This is likely to put a lot of burden on e-commerce players from documentation and compliance perspective," Saigal said.

Accounting for cash on delivery, returns and cancelled orders may impact cash flows for e-commerce companies known for discounting and subsidizing of products or offering free goods. Under GST, freebies are expected to be taxed creating additional burden on the sellers.